Federal Reserve and FDIC Explain Recent Resolution Planning Determinations (with Delta Strategy Group Summary)
The Board of Governors of the Federal Reserve System ("FRB") and the FDIC (collectively, the "Agencies") issued a report that provided determinations and firm-specific feedback concerning the 2015 resolution plans of eight systemically important banking institutions. The report explains the resolution-planning requirement and provides additional information on both the Agencies' determinations and their processes for reviewing the plans.
In assessing the 2015 resolution plans, the Agencies evaluated a number of areas, including seven key elements: (i) capital, (ii) liquidity, (iii) governance mechanisms, (iv) operational capabilities, (v) legal entity rationalization, (vi) derivatives and trading activities, and (vii) responsiveness.
The Agencies determined that five of the firms' plans were not credible or would not facilitate an orderly resolution under bankruptcy. Those jointly determined deficiencies must be addressed by October 1, 2016. The annual filing deadline is July 1, 2016, but all eight U.S. institutions that received feedback will have until July 1, 2017 to address the other shortcomings in their plans. Additionally, the Agencies issued new guidance to assist firms with their 2017 submissions.
In a separate report that was issued the day before the Agencies' release of their determinations, the Government Accountability Office ("GAO") encouraged the Agencies to make public the framework they use to determine whether an institution's living will is "credible." In its report on resolution plans, GAO warned that keeping this information confidential could "undermine public and market confidence in resolution plans." GAO also recommended that the Agencies revise the annual filing requirement for banks by extending the filing period to ensure that (i) regulators have the opportunity to review the plans and (ii) companies have the opportunity to incorporate regulatory feedback.
On April 14, 2016, the FDIC Systemic Resolution Advisory Committee held a meeting in order to provide advice on a broad range of issues involving the resolution of systemically important banking institutions. The agenda included an update on living wills.
Commentary
Through this report, the FRB and the FDIC have taken significant steps towards addressing some of GAO's concerns, particularly in the way they highlighted the seven key elements that they use to assess living wills. They also issued joint guidance going forward for the eight U.S. firms that filed resolution plans in July 2015, this guidance provides important disclosure on the review process. The Agencies also recognized that more time is required, which is why they gave firms until 2017 to fix the deficiencies cited.
The FRB and FDIC have more work to do in implementing all the GAO's recommendations. Providing full transparency may require some form of enhanced staff collaboration regarding their two separate processes and standards of review. The Agencies may also undertake GAO's suggestion and disclose aspects of their assessment frameworks as a supplement to the initial guidance issued in April 2013.
Even though they have given firms the latitude to fix certain deficiencies by July 2017, the Agencies should (and perhaps will) more formally address GAO's concern about the annual filing cycle . GAO recommended either extending the cycle to every two years or providing companies with at least six months from the date of the feedback or guidance in which to file another plan. The timeframe allotted to fixing deficiencies effectively addresses this recommendation, but the agencies should weigh the practicability of an annual review cycle – particularly since GAO determined that regulators took an average of nine months to complete their reviews, in part due to the plans' complexity.